CHAPTERS

SUMMARY, FINDINGS
AND CONCLUSIONS
 Summary, Findings and Conclusions

5.1. SUMMARY OF THE STUDY

The NPAs have always been a big worry for the banks in India. It is just not a
problem for banks but a curse for the economy too. The money locked up in
NPAs is not available for productive use and adversely affect on banks'
profitability. The extent of NPA is comparatively higher in public sectors
banks. To improve the efficiency and profitability, the NPAs have to be
scheduled. Various steps have been taken by government to reduce the NPAs.
This has led to decline in the level of NPAs of the Indian banking sector. But a
lot more needs to be done. The NPAs level of our banks is still high as
compared to the international standards. It is highly impossible to have zero
percentage NPAs. But at least Indian banks can try in competing with foreign
banks to maintain international standard. One cannot ignore the fact that a part
of the reduction in NPAs is due to the writing off bad loans by the banks. The
Indian banks should take care to ensure that they give loans to creditworthy
customers as prevention is always better than cure.

NPAs reflect the overall performance of the banks. A high level of NPAs
suggests high probability of a large number of credit defaults that affect the
profitability and net-worth of banks and also erodes the value of the asset. The
NPA growth involves the necessity of provisions, which reduces the overall
profits and shareholders’ value. Due diligence and utmost care must be taken
by the branch managers before sanctioning the loans to the clients and specially
in case of lending to priority sector. So, careful steps like selection of right
borrowers, viable economic activity, adequate finance and timely
disbursement, correct end use of funds and timely recovery of loans are
absolutely necessary pre conditions for preventing or minimizing the incidence
of new NPAs which will enhance the creditability of the banks and in turn
make the foundation of our country strong. Efficient management of loan assets
is need of the hour in the present day context.

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5.2. MAJOR FINDINGS

From the above analysis of primary and secondary data the key findings are:

> In secondary data analysis, a comparison of Gross NPA between Public

and Private sector Banks states that the share of Public sector banks is
72% and Private sector banks is 28%. So, it conforms that the
contribution of Private sector bank is minimum in both sectors.
> The ratio of Gross NPA to Gross Advance in Public Sector Banks is
more than the ratio of Private Sector Banks. From this it is clear that
NPA is more in Public Sector Banks as compare to Private sector banks.
> While discussing the contributing sectors of NPA, viz., Priority, Public
and Non-priority sector, the contribution of Public sector banks is higher
than the Private sector banks. The Public sector banks contribute 93%,
88% and 60% respectively to Priority, Public and Non-priority where as
the contribution of Private sector banks is 7%, 12% and 40%.
> So far as the Sub-sectors of Priority Sector NPA, the contributions by
Agriculture NPA, SMSE NPA and Other NPA are 95%,82% and 92% in
Public Sector Banks and 5%, 18% and 8% in Private Sector Banks
respectively . The contributions of private sector banks are negligible in
each sub-sector of Priority sector NPA.
> An Independent sample t-test of NPA between public and private sector
banks confirms that the gross NPA of the PSBs are not significantly
different from the gross NPA of the PRSBs.
> So far the ratio of gross NPA to gross advance, there is no significant
difference between SBI and BOM and AXIS and ICICI as per the
levene’s test.
> The t-test of priority sector NPA stated that there was a significant
difference between contribution made by PSBs and PRSBs, but they are
not significantly different in non-priority sector NPA.
> Further the Independent t-test between the sub-sectors of priority sector
states that the contribution of agriculture NPA of PSBs and PRSBs were

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not significantly different whereas in case of SMSE NPA and Other

NPA the reverse was happening.
> In analysing the Sector wise NPA of Public Sector Banks, Priority sector
NPA is highest followed by Non-Priority Sector NPA and the share of
Public Sector NPA is negligible.
> In analysing the Sector wise NPA of Private Sector Banks, Non-priority
Sector NPA is highest followed by Priority Sector NPA and the share of
Public Sector NPA is so small.
> Overall “Mismanagement of Funds” is the main cause of NPA
according to the view of Bank Officers.
> It is found that the most irregular sector of repayment of loan is Non-
Priority Sector Advance among the total advance given by the banks as
52.44% respondents agrees upon this.
> In controlling NPA, ‘Monitoring of the Loan’ has the main role
followed by securitization of loan and diligence process at loan
sanctioning stage. ‘Strengthening of the recovery cell at head office and
regional office’ and ‘Release of willful defaulters list’ also plays a vital
role in controlling NPA.
> Analysing the parameters of loan sanction by the banks taken as sample,
it is found that ‘Financial and Technical Viability’ is the most preferred
parameter. ‘Credibility/Net worth of the client’ followed by ‘Merit and
Feasibility of the client’ are also taken into consideration before
sanctioning a loan.
> By issue of lawyer notice, the defaulting borrowers response
immediately for the payment of due loan.
> Persuasion is the most effective technique for recovering major chunk of
default amount followed by OTS (out of court settlement) and legal
action as per the analysis.
> In collecting NPA through OTS, 86% respondents agree that OTS has
enhanced their collection. The officers opined that the acceptance of
OTS mostly influenced by ‘Availability and Realisation value of

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security’ and is followed by ‘Future cost of the amount realised’. Net

worth of borrower and guarantor gets third rank where as Impact on P/L
Account is in the fourth rank for accepting OTS.
> Analysing impact of SARFAESI on collection of loan, 76% respondents
have consented that it enhances loan recovery.
> As per the observation ‘legal actions against the borrower’ and
‘persuaded through personal follow up’ were the most effective
technique for recovering NPA.

5.3. REMEDIAL SUGGESTIONS

On the basis of the analysis of primary and secondary data, causal analysis by
way of interaction with Officers/Managers and personal interviews with
executives of banks, the following suggestions are made.

The suggestions are mainly aimed at improving Recovery Management of

NPAs by effective use of various non legal measures, legal provisions and also
toning up of organisational system within the bank for proper handling of such
accounts. In view of the external factors coming in the way of prompt recovery,
some of the suggestions also cover macro level strategies which may be
consider for recommendations to appropriate authorities such as Government
of India, R.B.I, for speedy recovery of banks’ dues. Practical aspect of
implementing the suggestions has also been taken into consideration.

> Banks should carry out their independent and objective credit appraisal
in all cases and must not depend on credit appraisal reports prepared by
outside consultants, especially the in-house consultants of the borrower
company.

> At the pre-disbursement stage, appraisal techniques of bank need to be

sharpened. All technical, economic, commercial, organisational and
financial aspects of the project need to be assessed realistically. While
advancing loans, the three principles of bank lending viz., Principle of

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 Summary, Findings and Conclusions

Safety, Principle of Liquidity and Principle of Profitability must be

adhered to.

> Banks need to follow the principles of prudent lending and should have
undertaken adequate checks to assess the credit-worthiness of
borrowers.

> A major cause for NPA is fixation of unrealistic repayment schedule.

Repayment schedule may be fixed taking into account gestation or
moratorium period, harvesting season, income generation, surplus
available etc.

> Banks should put in place a robust mechanism for early detection of
signs of distress, and measures, including prompt restructuring in the
case of all viable accounts wherever required, with a view to preserving
the economic value of such accounts.

> Before a loan account turns into an NPA, banks should identify incipient
stress in the account by creating a new sub-asset category viz. ‘Special
Mention Accounts’ (SMA). Based on warning signals obtained through
both off-site and on-site monitoring, banks may classify accounts with
irregularities persisting for more than 30 days under ‘Special Mention’
or ‘Potential NPA’ category.

> Bank to initiate proactive remedial measures for early regularisation.

The measures include timely release of additional funds to borrowers
with temporary liquidity problems and restructuring of accounts of
sincere and honest borrowers after considering cases on merit.

> Periodic analysis of secondary data of NPAs needs to be done at

corporate office/controlling offices for bank as a whole as well as region
wise. Ratio analysis, trend analysis, t-test as suggested in analysis
chapter may give useful indicator in this regard. This may help the top

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management to identify the problems, so as to indicate appropriate

strategies.

> For proper monitoring, each regional office may be suggested to list top
50 NPAs and put them on “critical cases list”. Branches having more
than 5% NPAs to their total advances may be termed as “critical
Branches”. These critical accounts and critical branches may be placed
under personal attention of the concerned Regional Heads with a view to
improving the Recovery.

> In comparative study of NPA in Public and private sector banks, the
contribution of private sector banks were much less than the public
sector banks. So, the researcher suggests that public sector banks should
follow the strategies of private sector banks for loan sanction and
recovery of loan.

> In primary data analysis, it was found that the most irregular sector of
loan repayment was ‘Non-priority Sector’. The researcher suggests
before sanctioning loan to Non-priority sector, bank officers should
check the viability of the project properly.

> Reference to the authority granting permission for filling suit, needs to
be made well in advance (at least six months before expiry of
limitations), so that hasty decisions are avoided and there is a scope for
them to make fresh efforts to strike a compromise by holding personal
discussion with the borrowers.

> To mandate banks to have proper system generated segment-wise data

on their NPA accounts, write-offs, compromise settlements, recovery
and restructured accounts.

> The provisioning in respect of existing loans/exposures of banks to

companies having directors (other than nominee directors of
govemment/financial institutions brought on board at the time of

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distress), whose names appear more than once in the list of willful
defaulters.

> ARCs should be construed as a supportive system for stressed asset

rather than the last resort to dispose of NPAs by banks.

> Creating of special cadre of officers will be taken up with the

Government. The post of Presiding Officers(POs) can be sought to be
filled through experienced ex-bankers fulfilling certain eligibility norms.

> A separate bench for speedy disposal of SARFAESI related cases may
be established in DRTs.

> It is also suggested that filling up of vacancies for the posts of senior
officials of DRTs to be expedited and computerisation of publication of
notices and auctions on the website should be explored. The
Government need to expeditiously implement the "e-DRT Project" to
automate and improve DRT services by building IT systems.

> A two-pronged strategy of preventing slippage of standard assets in to

NPA category and reducing NPAs through cash recovery, up gradation,
compromise, legal means etc.

> To be effective, NPA management has to be an exercise pervading the

entire bank from the Board down the last level.

> Last but not the least; the act(s) should be judiciously and selectively
applied so that NPAs should be converted into performing assets.

5.4. CONCLUSIONS
The incidence of non-performing assets (NPAs) are affecting the performance
of credit institutions both financially and psychologically. The non-performing
assets have become a major cause of concern. Imbibing the credit management
skills has become all the more important for improving the bottom-line of the
banking sector. It becomes essential to master the expertise for monitoring
 Summary, Findings and Conclusions

exposure levels, industry scenarios and timely action in respect of troubled

industries. Skills of NPA management, include working out negotiated
settlements, compromises constituting active settlement, advisory committees,
restructuring and rehabilitation, effective recourse to suitable legal remedies are
to be supplemented with most suitable legal reforms by banks to recover dues
well in time so that the financial soundness of the banking sector will not be
affected. On the international front, the various global risks associated with the
banking industry will expose the credit assets to greater risks while serious
efforts need to be taken for recovery measures, banks need to be equipped with
necessary risk appraisal system to minimise credit defaults. The position of
NPAs continues to haunt Indian banking Sector. Several experiments have
been tried to curb NPAs (viz., BIFR/SICA, lok adalats, DRTs, OTS,
SARFAESI etc) but nothing has hit the mark in tackling NPAs. The validity of
both DRT/ Securitisation act was challenged and still hangs in dilemma, which
has dampened the spirits of bankers. A clear discrimination is warranted while
formulating any strategy in addressing the problem of genuine and willful
defaulters. There should be a real crackdown on willful defaulters and their
assets whether or not charged to banks should be declared as national assets
and be disposed in a transparent manner, without major legal hurdles.

5.5. SCOPE FOR FURTHER STUDY

Few studies have also indicated a relationship between the size of the bank and
the level of bad loans. Bank’s seizes are often found negatively related to the
rate of non-performing loan (Hu et al, 2002).

The sample size is small and studies the banking system as a whole. Future
research can explore the practices being adopted by the most efficient banks for
each of the factors studied and recommendations can be made for the banking
system in general. Industry wise NPA can be analysed. More number of years
can be taken for the study for getting more appropriate result on NPA.

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